The Fed Rate Cut: Alan Shrugged

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Carrying the thin briefcase, but few encouraging words, Greenspan arrives for work

Alan Greenspan knew what the markets wanted. Quarter-point, half-point, no points, it didn't matter. What counted for everyone eagerly awaiting the Fed's 2:15 p.m. rate cut announcement were the words that went with it. And the words everyone was looking for were these: "We’re almost done."

Sorry. "Of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Federal Open Market Committee said Tuesday as it cut — as everyone figured — another 25 basis points off its target for the fed funds rate, which now stands at 3.5 percent.

The pace of cuts has officially slowed — after five straight 50-point chops, the Fed cut 25 points for the second straight meeting — but the language sure hasn’t. Consumer spending "has been sustained." Long-term prospects "remain favorable." Inflation still looks "contained."

But the same Fed that blew a small hole in the markets last week with a jarringly gloomy "Beige Book" report still doesn’t see the economy’s primary maladies — capital investment and idled assembly lines — releasing their hold anytime soon. And there may be more trouble on the way. "Business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy."

And as Alan shrugged, all of Wall Street just sighed. The Dow and NASDAQ sold off the miniature run-ups both indexes had posted in advance of the announcement and then some, with the losses hitting 150 on the Dow and 40 on the NASDAQ by day's end. Certainly there was no reason to rally — in the nearly nine months since Greenspan began the most aggressive rate-cutting spree in two decades, the Dow is off three percent and the NASDAQ is down 17. Another cut was not about to stir hearts, not without a little optimism from the world’s most influential economic forecaster.

The underlying fear is that Greenspan may know better than to oblige. The FOMC board is still divided between those who fear recession and want more cuts, and those who fear that the Fed, by continuing to cut into a business-based slowdown that is bound to let up eventually, is sowing the seeds of inflation — and another unseemly lurch in monetary policy — when it does. The cut most likely reflects the second straight compromise between the two camps.

For Greenspan, though, it looks like insurance. Odds are he’s as convinced as anyone that the upturn will arrive one of these days; hence the recurring appearance of the phrase "long-term prospects for productivity growth and the economy remain favorable." What he doesn’t know yet — what he doesn’t see yet — is when.

And with Japan in recession and Europe getting there faster than anybody expected, with Argentina and Turkey and Singapore and everybody else battling some form of the U.S. affliction, he may be coming to the conclusion that this malady could linger on indefinitely. By staying the incremental, quarter-point course, he’s allowing that it may not. But after getting whipped around by this market for the past three years — and missing pretty much all the inflection points along the way — he’s not about to have his Fed stand down without a real improvement in this economy’s vital signs.

As to when that might happen, well, Greenspan just admitted he doesn’t know either.